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Sara Lee Corporation (SRL)

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Thursday 03 November, 2011

Sara Lee Corporation

Sara Lee Reports Solid Start to the Year

Sara Lee Reports Solid Start to the Year

Sara Lee Corporation

Sara Lee Corp. (NYSE: SLE) today reported earnings for the first quarter and updated the progress of the spin-off of the company’s international coffee & tea business.

First Quarter Highlights (continuing operations):

  • Adjusted net sales1 increased 6% and adjusted operating income increased 4%; reported net sales increased 13% while reported operating income declined 29%
    • Meat2 adjusted net sales declined 0.6% and adjusted operating segment income declined 4%; reported net sales increased 2% and reported operating segment income declined 17%
    • Coffee & Tea adjusted net sales increased 14% and adjusted operating segment income increased 20%; reported net sales and operating segment income increased 27% and 26%, respectively
  • Total MAP spend up 27%, with both Meat and Coffee & Tea showing significant increases
  • Adjusted EPS increased $0.06 to $0.18; reported EPS decreased $0.15 to $(0.06)
  • Reaffirm full year adjusted EPS guidance of $0.89 - $0.95, despite headwinds from unfavorable foreign currency exchange rates and the reclassification of N.A. Foodservice Beverage as a discontinued operation
 

Key Financial Data, Continuing Operations

    First Quarter
($ millions, except per share)   2012   2011   % Change
Sales   Adjusted 1,900   1,798   5.7
  Reported   1,943   1,727   12.5

Operating
Income

Adjusted 182 175 4.1
  Reported   111   157   (29.4)
EPS Adjusted 0.18 0.12 50.0
  Reported Diluted   (0.06)   0.09   NM
 

1 The term “adjusted net sales” and other “adjusted” financial measures are explained and reconciled to comparable GAAP measures at the end of this release.

2 Meat is the summation of the N.A. Retail and N.A. Foodservice & Specialty Meats segments

Perspectives from Executive Chairman & Chief Executive Officer

“We are moving forward aggressively, preparing our Meat and Coffee & Tea businesses for strong futures as independent pure-play companies,” said Sara Lee Executive Chairman, Jan Bennink. “Within the past month we have closed the sale of North American refrigerated dough to Ralcorp and announced the sales of Spanish bakery to Grupo Bimbo and the majority of the North American foodservice beverage operations to J.M. Smucker. We have also gained DOJ approval on the North American Fresh Bakery sale to Grupo Bimbo. These actions demonstrate our progress toward the creation of two focused entities that are poised for long-term growth. Meanwhile, we are increasing our investment in the future, with strong support behind core brands and new product development. The solid performance of our base business and our exciting pipeline of innovation give me great confidence that both companies are positioned for successful futures.”

Chief Executive Officer Marcel Smits added, “We’re pleased with the solid top and bottom line performances of our businesses while facing the challenge of managing volume and margins in an environment of commodity inflation and weak macroeconomic conditions. The Coffee & Tea business showed strong progress, with double-digit top and bottom line growth and margin expansion despite a healthy increase in marketing investment. In North America, we’ve invested heavily behind new product launches, implemented organizational changes and achieved further cost reductions. For Sara Lee as a whole, we are on track to achieve our goal of $180 to $200 million in cost savings. All of these initiatives taken together give us confidence for the remainder of the year and allow us to maintain our EPS guidance despite a currency headwind and the exclusion of our N.A. Foodservice Beverage business from continuing operations.”

Fiscal 2012 Guidance

The company reaffirms the following guidance:

  • Adjusted EPS of $0.89 - $0.95, despite headwinds from unfavorable foreign currency exchange rates and the reclassification of N.A. Foodservice Beverage as a discontinued operation
  • Adjusted operating income (including acquisitions) of $875 - $930 million
  • Tax rate of 33.4%

The company updates the following guidance:

  • Net sales of $7.9 - $8.15 billion, now reflecting unfavorable foreign currency exchange rates and the reclassification of N.A. Foodservice Beverage as a discontinued operation
  • Year-end cash of $300 million (unchanged) and year-end debt of $2.1 billion
  • Net interest expense of $80 million
  • Dollar/Euro exchange rate at $1.39

    Meat

The Meat business implemented cost reductions and reorganizations largely driven by the company’s numerous portfolio changes. The newly acquired Aidells business was integrated with Sara Lee’s Gallo business and is now reported under Foodservice and Specialty Meats.

             
($ millions)   Q1 FY12   Q1 FY11   % Change
  Retail  

Foodserv. /
Spec. Meats

  Total   Total  
Sales   Adjusted   684   280   964   969   (0.6)
  Reported   684   307   991   969   2.3
MAP   42   5   47   39   22.5

Operating segment
income

Adjusted 56 27 83 86 (4.0)
  Reported   42   27   69   83   (17.4)
 

North American Retail

The Retail segment reported a 2% decline in adjusted and reported net sales to $684 million, as the positive effect of higher prices was more than offset by volume declines. In the prior year, the first quarter showed strong volume growth partially driven by heavy promotional expenditure. During the first quarter of this year, the company launched several new products under the Hillshire Farm brand, including Grilled Essentials, Gourmet Creations and Deli Carvers. These innovations resulted in start-up and marketing expenses in the first quarter of this year, but will have a positive impact on performance from the second quarter through the remainder of the year.

Adjusted operating segment income declined 9% to $56 million as volume declines and higher marketing investment offset SG&A savings and efficiencies from the implementation of SAP across all meat plants. MAP spending was 13% higher behind the launch of new products and support of the core brands. Pricing actions along with cost savings more than offset continued increases in commodity costs. Reported operating segment income declined $18 million.

Looking forward, the segment will increasingly benefit from a number of factors, including the positive impact of innovation and selective pricing actions to improve volume softness. Meanwhile, the lapping of price increases and the increasing benefits of cost initiatives taken in recent quarters will contribute to the bottom line.

North American Foodservice & Specialty Meats

The newly-named North American Foodservice & Specialty Meats segment is comprised of the North American foodservice meats and bakery businesses (the beverage business is now reported as a discontinued operation) and the company’s specialty meats business, currently consisting of Aidells and Gallo. The results for Aidells and Gallo previously had been included in North American Retail.

The North American Foodservice & Specialty Meats segment reported another quarter of solid top-line growth. Adjusted net sales increased 2% to $280 million, driven largely by pricing actions taken across the portfolio, while volumes increased 2%, including the contribution from the Aidells acquisition. Excluding Aidells, volumes declined 2% versus a strong prior year quarter driven by soft restaurant traffic and declines in foodservice bakery. Reported net sales grew by 12%, largely driven by strong performance from Aidells, which outperformed expectations with double-digit volume and sales growth.

Adjusted operating segment income increased 7% to $27 million driven by manufacturing and SG&A savings. The adjusted operating margin expanded 40 basis points over the prior year to 9.6%. Reported operating segment income grew 16% while the reported operating margin also increased 40 basis points to 8.9%.

     

Coffee & Tea

 
($ millions)   Q1 FY12   Q1 FY11  

%
Change

 

Sales   Adjusted 906 793 14.3
  Reported   922   728   26.6
MAP   41   31   31.8

Operating
segment income

Adjusted 121 101 19.5
  Reported   114   90   26.3
 

The Coffee & Tea segment made a broad-based rebound versus the fourth quarter of fiscal 2011, evidencing a strong start to the year. Adjusted net sales increased 14%, to $906 million versus the prior year, supported by an increase in MAP spending of 32%. The increase in adjusted net sales was driven by pricing and mix growth of 14% and 4%, respectively. The company’s strategic choice to phase out private label production in France contributed to a volume decline of 3%.

The success of the L’OR EspressO capsules, continued good performance of Senseo in Spain and France, and the termination of private label production in France each contributed to positive mix growth. Price increases were enacted in multiple markets to offset commodity price increases in fiscal 2011. Barring any unforeseen spikes in green coffee prices from current levels, price increases and cost savings are expected to offset higher commodity prices from the second quarter of fiscal 2012 onwards. Reported net sales increased 27% to $922 million.

Although the Western Europe businesses continue to operate in a challenging environment, these operations showed a marked improvement compared to the fourth quarter of fiscal 2011. Spain, the Netherlands and Denmark improved volume trends compared to the preceding quarter. In the Netherlands, the company increased its value share in each of the last 4 months. L’OR EspressO continues to perform well in France, the Netherlands, Belgium and most notably in Spain where it commands 10.6% value share of the total retail coffee market only 20 weeks post-launch.

Businesses in the rest of the world delivered strong volume and sales performance, led by Brazil, Australia and Poland. Australia continued to gain market share in the retail instant coffee market, aided by increased MAP spending and the introduction of Moccona Café Classics Frappé, a unique offer in the cold instant coffee mix segment.

Despite the increase in MAP spend to $41 million, adjusted operating segment income increased 19% to $121 million. The adjusted operating margin of 13.3% was supported by positive mix and pricing to offset peak levels of green coffee commodity costs experienced during the quarter. Reported operating segment income increased 26% to $114 million and the reported operating margin was 12.3%.

Additional Information

Australian Bakery

The former International Bakery segment is now made up of only Australian Bakery as the operations in Spain and France have been moved to discontinued operations.

Corporate Expenses

         
($ millions, excluding significant items)   Q1 FY12   Q1 FY11
General corporate expenses   (10 )   (23 )
Commodity MTM gains/(losses) (11 ) 12
Amortization of trademarks and intangibles   (3 )   (3 )
Total corporate expenses   (24 )   (14 )
 

The company continues to make good progress in reducing corporate expenses while ensuring all the necessary actions are executed prior to the spin-off. Excluding significant items, general corporate expenses were $10 million for the quarter, a decline of $13 million from the prior year. The reduction was primarily due to lower corporate headcount costs and pension expenses.

Commodity Costs (including Currency Mark to Market)

For the first quarter, the company’s total commodity costs increased by $153 million (net of an $11 million currency mark-to-market gain in the first quarter versus a $27 million loss in the prior year – the $38 million year-over-year benefit is included in the Coffee and Tea results), offset by $160 million in higher prices.

Cash from Operations

Net cash from operating activities was an outflow of $220 million in the first quarter, compared to an inflow of $28 million in the prior year quarter. The decrease was primarily due to a one-time €60 million payment to the Netherlands pension plan, increased working capital due to higher commodity costs, and a significant decline in the cash generated by discontinued operations.

Restructuring Activities

The company confirms the following projections from its fourth quarter fiscal 2011 release dated August 11:

  • Cost reduction opportunities of $180 - $200 million, compared to the fiscal 2011 base and achievable within fiscal 2012 and 2013. These savings are a result of downsizing corporate resources, reducing overhead in the Meat and Coffee & Tea businesses and completing Project Accelerate initiatives.
  • $50-$60 million in stranded overhead costs from business divestitures

The company expects fiscal 2012 significant items, excluding impairment charges and gains or losses on the sale of businesses, to be $450-$475 million. Included in this amount are estimated charges as a result of further anticipated actions following the sale and restructuring within North American Beverage.

Timing of Payment of the $3.00 Special Dividend

The company expects to declare and pay the $3.00 special dividend in the first half of calendar 2012 before completion of the spin-off.

Diluted Earnings Per Share

  First Quarter
Continuing Operations   Total Company
2012     2011     2012     2011  
Diluted EPS as reported $(0.06 )   $0.09 $(0.37 )   $0.29
Less:
Gain on sale of discontinued operations - - 0.16 0.14
Tax related items (0.15 ) 0.01 (0.07 ) -
Other significant items (0.09 )   (0.04 )   (0.67 )   (0.05 )
Adjusted EPS* $0.18 $0.12 $0.21 $0.21
* Amounts are rounded and may not add to the total.
 

Impairment Charge

A $371 million impairment charge has been recognized in discontinued operations in the quarter relating to the Spanish and French bakery businesses.

Webcast and Form 10-K

Sara Lee Corporation’s review of its results for the first quarter will be broadcast live via the Internet today at 10:00 a.m. CDT. The live webcast can be accessed in the Investor Relations section on www.saralee.com and is anticipated to conclude by 11:00 a.m. CDT. For people who are unable to listen to the webcast live, a recording will be available on the website at 7:00 p.m. on the day of the webcast until May 3, 2012. Sara Lee has also provided slides containing additional information that will be reviewed during its first quarter webcast. The slides can be accessed in the Investor Relations section on www.saralee.com under Investor News and Events.

Amounts included in the release are preliminary, pending Sara Lee Corporation’s filing of its Form 10-Q with the Securities and Exchange Commission on or before November 10, 2011. The Form 10-Q will be available in the Investor Relations section (Financial/SEC Information page) on www.saralee.com.

About Sara Lee Corporation

Sara Lee Corp. (NYSE: SLE) and it's leading portfolio of food and beverage brands, including Ball Park, Douwe Egberts, Hillshire Farm, Jimmy Dean, Pickwick Teas, Sara Lee and Senseo, generate nearly $9 billion in annual net sales from continuing operations and employ approximately 20,000 people worldwide. In January 2011, Sara Lee Corp. announced that it will divide the company into two pure-play publicly-traded companies, one focused on the international coffee and tea market and the other on North American meats. For more information on the company, please visit www.saralee.com.

Forward-Looking Statements

This release contains forward-looking statements regarding Sara Lee’s business prospects and future financial results and metrics, including statements contained under the heading “Fiscal 2012 Guidance.” In addition, from time to time, in oral statements and written reports, the corporation discusses its expectations regarding the corporation’s future performance by making forward-looking statements preceded by terms such as “anticipates,” “we are confident,” “expects,” “likely” or “believes.” These forward-looking statements are based on currently available competitive, financial and economic data and management’s views and assumptions regarding future events and are inherently uncertain.

Investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements, and the corporation wishes to caution readers not to place undue reliance on any forward-looking statements. Among the factors that could cause Sara Lee’s actual results to differ from such forward-looking statements are those described under Item 1A, Risk Factors, in Sara Lee’s most recent Annual Report on Form 10-K and other SEC Filings, as well as factors relating to:

  • Sara Lee’s proposed spin-off plans and the special dividend announced on Jan. 28, 2011, such as (i) unanticipated developments that delay or negatively impact the proposed spin-off and capital plans; (ii) Sara Lee’s ability to obtain an IRS tax ruling and any other customary approvals; (iii) Sara Lee’s ability to generate the anticipated efficiencies and savings from the spin-off including a lower effective tax rate for the spin-off company; (iv) the impact of the spin-off on Sara Lee’s relationships with its employees, major customers and vendors and on Sara Lee’s credit ratings and cost of funds; (v) changes in market conditions; (vi) future opportunities that the Board may determine present greater potential value to shareholders than the spin-off and special dividend; (vii) the inability to complete the sale of Sara Lee’s North American Fresh Bakery business, a condition to the payment of the special dividend; (viii) disruption to Sara Lee’s business operations as a result of the spin-off; (ix) future operating or capital needs that require a more significant outlay of cash than currently anticipated; and (x) the ability of the businesses to operate independently following the completion of the spin-off;
  • Sara Lee’s relationship with its customers, such as (i) a significant change in Sara Lee’s business with any of its major customers, such as Walmart, its largest customer; and (ii) credit and other business risks associated with customers operating in a highly competitive retail environment;
  • The consumer marketplace, such as (i) intense competition, including advertising, promotional and price competition; (ii) changes in consumer behavior due to economic conditions, such as a shift in consumer demand toward private label; (iii) fluctuations in raw material costs, Sara Lee’s ability to increase or maintain product prices in response to cost fluctuations and the impact on Sara Lee’s profitability; (iv) the impact of various food safety issues and regulations on sales and profitability of Sara Lee products; and (v) inherent risks in the marketplace associated with product innovations, including uncertainties about trade and consumer acceptance;
  • Sara Lee’s international operations, such as (i) impacts on reported earnings from fluctuations in foreign currency exchange rates, particularly the euro; (ii) Sara Lee’s generation of a high percentage of its revenues from businesses outside the United States and costs to remit these foreign earnings into the U.S. to fund Sara Lee’s domestic operations, dividends, debt service and corporate costs; (iii) difficulties and costs associated with complying with U.S. laws and regulations, such as Foreign Corrupt Practices Act, applicable to global corporations, and different regulatory structures and unexpected changes in regulatory environments overseas; and (iv) Sara Lee’s ability to continue to source production and conduct operations in various countries due to changing business conditions, political environments, import quotas and the financial condition of suppliers;
  • Previous business decisions, such as (i) Sara Lee’s ability to generate margin improvement through cost reduction and efficiency initiatives; (ii) Sara Lee’s credit ratings, the impact of Sara Lee’s capital plans on such credit ratings and the impact these ratings and changes in these ratings may have on Sara Lee’s cost to borrow funds and access to capital/debt markets; (iii) the settlement of a number of ongoing reviews of Sara Lee’s income tax filing positions in various jurisdictions and inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which Sara Lee transacts business; and (iv) changes in the expense for and contingent liabilities relating to multi-employer pension plans in which Sara Lee participates.

In addition, Sara Lee’s results may also be affected by general factors, such as economic conditions, political developments, interest and inflation rates, accounting standards, taxes and laws and regulations in markets where the corporation competes. Sara Lee undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

       

Financial Summary

For the Quarters ended Oct. 1, 2011 and Oct. 2, 2010 (in millions, except per share data - unaudited)
 
Quarter ended Quarter ended
As Reported As Adjusted
 
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
2011 2010 Change 2011 2010 Change
Continuing Operations:
 
Net sales:
 
N.A. Retail $ 684 $ 695 (1.6 )% $ 684 $ 695 (1.6 )%
N.A. FS & Specialty Meats 307 274 12.0 280 274 2.0
Coffee & Tea 922 728 26.6 906 793 14.3
Australian Bakery 38 36 5.4 38 42 (9.1 )
Intersegment   (8 )   (6 )     (8 )   (6 )  
Total net sales $ 1,943   $ 1,727   12.5 % $ 1,900   $ 1,798   5.7 %
 
 
Operating income/(loss)
 
N.A. Retail $ 42 $ 60 (30.4 )% $ 56 $ 61 (8.5 )%
N.A. FS & Specialty Meats 27 23 16.2 27 25 6.8
Coffee & Tea 114 90 26.3 121 101 19.5
Australian Bakery   2     2   8.0     2     2   ( 10.1 )
Operating segment income 185 175 5.3 % 206 189 8.4 %
 
General corporate expenses (60 ) (27 ) (10 ) (23 )
Mark-to market derivatives gains/(losses) (11 ) 12 (11 ) 12
Amortization of trademarks & intangibles   (3 )   (3 )     (3 )   (3 )  
Total operating income $ 111   $ 157   (29.4 )% $ 182   $ 175   4.1 %
 
 
Income/(loss) from continuing operations $ (34 ) $ 61   NM   $ 108   $ 81   34.5 %
 
Net Income/(loss) $ (215 ) $ 194   NM   $ 129   $ 137   (5.9 )%
 
Net Income/(loss) attributable to Sara Lee:
Continuing operations $ (34 ) $ 61 NM $ 108 $ 81 34.5 %
Discontinued operations $ (183 ) $ 131 NM $ 19 $ 54 (66.7 )%
 
 
Diluted earnings per share:
 
Income/(loss) from continuing operations $ (0.06 ) $ 0.09   NM   $ 0.18   $ 0.12   50.0 %
 
Net Income/(loss) $ (0.37 ) $ 0.29   NM   $ 0.21   $ 0.21   0.0 %
 
Operating Margin:
 
N.A. Retail 6.1 % 8.7 % (2.6 )% 8.1 % 8.7 % (0.6 )%
N.A. FS & Specialty Meats 8.9 8.5 0.4 9.6 9.2 0.4
Coffee & Tea 12.3 12.3 0.0 13.3 12.7 0.6
Australian Bakery 6.4 6.2 0.2 6.2 6.2 0.0
 
Total Sara Lee 5.7 % 9.1 % (3.4 )% 9.6 % 9.7 % (0.1 )%
 
NM = Not meaningful
 

 

   

Consolidated Statements of Income

For the Quarters ended Oct. 1, 2011 and Oct. 2, 2010 (in millions, except per share data - unaudited)
 
Quarter ended
October 1, October 2,
2011 2010
Continuing operations
Net sales $ 1,943   $ 1,727  
Cost of sales 1,327 1,157
Selling, general and administrative expenses 455 409
Net charges for exit activities, asset and business dispositions 32 4
Impairment charges   18     -  
Operating income 111 157
Interest expense 30 34
Interest income (9 ) (5 )
Debt extinguishment costs   -     30  
Income from continuing operations before income taxes 90 98
Income tax expense   124     37  
Income/(loss) from continuing operations   (34 )   61  
 
Discontinued operations:
Income (loss) from discontinued operations,
net of tax expense (benefit) of $(62) and $25 (273 ) 44
Gain on sale of discontinued operations, net of
tax expense of $170 and $166   92     89  
Net income/(loss) from discontinued operations   (181 )   133  
 
Net income/(loss) (215 ) 194
 
Less: Income from noncontrolling interests, net of tax
Discontinued operations   2     2  
Net income/(loss) attributable to Sara Lee $ (217 ) $ 192  
 
Amounts attributable to Sara Lee:
Net income/(loss) from continuing operations $ (34 ) $ 61
Net income/(loss) from discontinued operations (183 ) 131
 
Earnings per share of common stock:
Basic
Income/(loss) from continuing operations $ (0.06 ) $ 0.09
Net income/(loss) $ (0.37 ) $ 0.29
Average shares outstanding 591 653
 
Diluted
Income/(loss) from continuing operations $ (0.06 ) $ 0.09
Net income/(loss) $ (0.37 ) $ 0.29
Average shares outstanding 591 655
 
 
Cash dividends declared per share of common stock $ - $ -
 

 

 

Net Sales Bridge

For the Quarter ended Oct. 1, 2011 (unaudited)
 
The following table illustrates the components of the change in net sales versus the prior year for each of the four reported business segments
 
First Quarter ended October 1, 2011
Adjusted Total
Unit Net Sales* Acq./ Foreign Net Sales
Volume Mix + Price + Other = Change + Disp. + Exchange = Change
N.A. Retail (7.3 )% 0.0 % 6.3 % (0.6 )% (1.6 )% 0.0 % 0.0 % (1.6 )%
 
N.A. FS and Specialty Meats (2.5 ) (0.5 ) 5.4 (0.4 ) 2.0 9.9 0.1 12.0
 
Coffee & Tea (3.1 ) 3.8 13.7 (0.1 ) 14.3 1.9 10.4 26.6
 
Australian Bakery (12.6 ) (1.6 ) 5.0 0.1 (9.1 ) 0.0 14.5 5.4
               
Total Continuing Business (4.7 )% 1.4 % 9.3 % (0.3 )% 5.7 % 2.4 % 4.4 % 12.5 %
 
*Adjusted net sales is a non-GAAP measure that excludes the impact of foreign currency exchange rates and acquisitions/dispositions. See detailed explanation of this and other non-GAAP measures in this release.

 

   

Condensed Consolidated Balance Sheet Data

At Oct. 1, 2011 and July 2, 2011 (in millions - unaudited)
 
October 1, July 2,
  2011   2011
 
Assets
Cash and equivalents $ 1,685 $ 2,066
Trade accounts receivable, less allowances 766 778
Inventories 1,025 884
Current deferred income taxes 43 42
Other current assets

297

259
Receivable for proceeds on disposition

552

-
Assets held for sale   511   555
Total current assets 4,879 4,584
Property, net of accumulated depreciation of $2,028 and $2,057, respectively 1,321 1,380
Trademarks and other identifiable intangibles 258 282
Goodwill 597 624
Deferred income taxes 185 260
Other noncurrent assets 583 497
Noncurrent assets held for sale   1,229   1,906
$ 9,052 $ 9,533
 
Liabilities and Equity
Notes payable $ 439 $ 238
Accounts payable 740 826
Income taxes payable and current deferred taxes 439 468
Other accrued liabilities 1,299 1,566
Current maturities of long-term debt 443 473
Liabilities held for sale   533   551
Total current liabilities   3,893   4,122
Long-term debt 1,935 1,935
Pension obligation 206 216
Deferred income taxes 362 179
Other liabilities 726 807
Noncurrent liabilities held for sale 294 300
Equity
Sara Lee common stockholders’ equity 1,607 1,945
Noncontrolling interest   29   29
Total Equity   1,636   1,974
$ 9,052 $ 9,533

 

   

Consolidated Statements of Cash Flows

For the Three Months Ended Oct. 1, 2011 and Oct. 2, 2010 (in millions - unaudited)
 
Three Months ended
 
Oct. 1, Oct. 2,
2011   2010
Operating activities -
Net income/(loss) $ (215 ) $ 194
 
Adjustments to reconcile net income/(loss) to net cash
from operating activities:
Depreciation 61 82
Amortization 12 21
Impairment charges 389 -
Net (gain) loss on business dispositions (262 ) (255 )
Pension contributions, net of expense (117 ) (17 )
Increase in deferred income taxes for unremitted earnings 8 77
Increase in deferred income taxes for tax basis differences (118 )
Debt extinguishment costs - 30
Other (6 ) 21
Changes in current assets and liabilities, net of
businesses acquired and sold:
Trade accounts receivable (32 ) 35
Inventories (221 ) (140 )
Other current assets (59 ) (64 )
Accounts payable 27 9
Accrued liabilities 26 (47 )
Accrued taxes   287     82  
Net cash from (used in) operating activities   (220 )   28  
 
Investing activities -
Purchases of property and equipment (55 ) (66 )
Purchases of software and other intangibles (1 ) (7 )
Dispositions of businesses and investments (16 ) 355
Cash received from derivative transactions 18 26
Sales of assets   1     7  
Net cash received from (used in) investing activities   (53 )   315  
 
Financing activities -
Issuances of common stock 29 1
Purchases of common stock - (373 )
Borrowings of other debt 30 890
Repayments of other debt and derivatives (162 ) (708 )
Net change in financing with less than 90-day maturities 187 (22 )
Purchase of noncontrolling interest (10 ) -
Payments of dividends   (68 )   (73 )
Net cash from ( used in) financing activities   6     (285 )
 
Effect of changes in foreign exchange rates on cash   (114 )   112  
 
Increase (decrease) in cash and equivalents (381 ) 170
Add: Cash balances of discontinued operations at beginning of year - -
Less: Cash balances of discontinued operations at end of period - -
Cash and equivalents at beginning of year   2,066     955  
 
Cash and equivalents at end of quarter $ 1,685   $ 1,125  
 
Supplemental cash flow data:
 
Cash paid for restructuring actions $ 66 $ 25
Cash contributions to pension plans 115 30
Cash paid for income taxes 56 68

 

           

Operating Results by Business Segment

For the Quarters ended Oct. 1, 2011 and Oct. 2, 2010 (in millions - unaudited)
 
Changes in
Foreign
Currency
As Exchange Acquisitions/ As
Reported Rates Dispositions Adjusted
First Quarter 2012
Net sales:
N.A. Retail $ 684 $ - $ - 684
N.A. FS & Specialty Meats 307 - 27 280
Coffee & Tea 922 - 16 906
Australian Bakery 38 - - 38
Intersegment (8 )   -     -   (8 )
Total net sales $ 1,943   $ -   $ 43   1,900  
 
First Quarter 2011
Net sales:
N.A. Retail $ 695 $ - $ - 695
N.A. FS & Specialty Meats 274 - - 274
Coffee & Tea 728 (66 ) 1 793
Australian Bakery 36 (6 ) - 42
Intersegment (6 )   -     -   (6 )
Total net sales $ 1,727   $ (72 ) $ 1   1,798  
 
 
Changes in
Foreign HBI
Currency Settlement/
First Quarter 2012 As Exchange Acquisitions/ Restructuring Impairment Tax As
Reported Rates Dispositions Actions Charges Indemnification Adjusted
Operating income:
N.A. Retail $ 42 $ - $ - $ (14 ) $ - $ - $ 56
N.A. FS & Specialty Meats 27 - 1 (1 ) - - 27
Coffee & Tea 114 - 2 (9 ) - - 121
Australian Bakery   2     -     -   -     -     -   2  
Total operating segment income   185     -     3   (24 )   -     -   206  
 
General corporate expenses (60 ) - - (50 ) (18 ) 18 (10 )
Mark-to-market derivative gains/(losses) (11 ) - - - - - (11 )
Amortization of trademarks/intangibles   (3 )   -     -   -     -     -   (3 )
Operating income $ 111   $ -   $ 3 $ (74 ) $ (18 ) $ 18 $ 182  
 
First Quarter 2011
Operating income:
N.A. Retail $ 60 $ - $ - $ (1 ) $ - $ - $ 61
N.A. FS & Specialty Meats 23 - - (2 ) - - 25
Coffee & Tea 90 (9 ) - (2 ) - - 101
Australian Bakery   2     -     -   -     -     -   2  
Total operating segment income   175     (9 )   -   (5 )   -     -   189  
 
General corporate expenses (27 ) (1 ) - (3 ) - - (23 )
Mark-to-market derivative gains/(losses) 12 - - - - - 12
Amortization of trademarks/intangibles   (3 )   -     -   -     -     -   (3 )
Operating income $ 157   $ (10 ) $ - $ (8 ) $ -   $ - $ 175  
 

 

           

Significant Items

Quarters ended Oct. 1, 2011 and Oct. 2, 2010 (in millions, except per share data - unaudited)
 
Quarter ended Oct. 1, 2011 Quarter ended Oct. 2, 2010
Diluted Diluted
Pretax Net EPS Pretax Net EPS

(In millions except per share data)

Impact Income/(loss) Impact (1) Impact Income/(loss) Impact (1)
 
Continuing Operations:
Restructuring actions:
Severance/ retention costs $ (28 ) $ (19 ) $ (0.03 ) $ (4 ) $ (2 ) -
Lease and contractual obligation exit costs (6 ) (4 ) (0.01 ) - - -
Consulting/advisory costs (34 ) (27 ) (0.05 ) (2 ) (2 ) -
Accelerated depreciation   (6 )   (4 )   (0.01 )   (2 )   (1 )   -  
Total restructuring actions (74 ) (54 ) (0.09 ) (8 ) (5 ) (0.01 )
 

Gain on HBI tax settlement

15 10 0.02 - - -
Impairment charges (18 ) (11 ) (0.02 ) - - -
Tax indemnification accrual adjustment 3 2 - - - -
Debt extinguishment costs   -     -     -     (30 )   (19 )   (0.03 )
Impact of significant items on income/(loss) from continuing operations before income taxes   (74 )   (53 )   (0.09 )   (38 )   (24 )   (0.04 )
 
Tax on unremitted earnings - (84 ) (0.14 ) - - -
Tax audit settlement/reserve adjustments - 70 0.12 - 4 0.01
Tax valuation allowance adjustment   -     (75 )   (0.13 )   -     -     -  
 
Impact of significant items on income/(loss) from continuing operations   (74 )   (142 )   (0.24 )   (38 )   (20 )   (0.03 )
 
Discontinued operations:
Restructuring actions:
Severance/ retention costs (1 ) (1 ) - (10 ) (7 ) (0.01 )
Consulting/advisory costs (7 ) (5 ) (0.01 ) (3 ) (2 ) -
Impairment charges (371 ) (336 ) (0.57 ) - - -
Gain on the sale of discontinued operations 262 92 0.16 255 89 0.14
Tax basis differences - 118 0.20 - 2 -
Tax on unremitted earnings   -     (70 )   (0.12 )   -     (5 )   (0.01 )
Impact of significant items on income/(loss) from discontinued operations   (117 )   (202 )   (0.34 )   242     77     0.12  
Impact of significant items on net income/(loss) $ (191 ) $ (344 ) $ (0.58 ) $ 204   $ 57   $ 0.08  
 
 
Impact of significant items on income from continuing operations before income taxes
 
Cost of sales $ (6 ) $ (2 )
Selling, general and administrative expenses (18 ) (2 )
Exit and business dispositions (32 ) (4 )
Impairment charges (18 ) -
Debt extinguishment costs   -     (30 )
Total $ (74 ) $ (38 )
 
Notes:
(1) EPS amounts are rounded to the nearest $0.01 and may not add to the total.

 

             

EPS Reconciliation - Reported to Adjusted

Quarters ended Oct. 1, 2011 and Oct. 2, 2010 (in millions, except per share data - unaudited)
 
Quarter ended October 1, 2011 Quarter ended October 2, 2010
Impact of Impact of
As Significant As Significant
Reported Items Adjusted (1) Reported Items Adjusted (1)
Continuing operations:
 
Income/(loss) from continuing operations
before income taxes $ 90 $ (74 ) $ 164 $ 98 $ (38 ) $ 136
 
Income tax expense (benefit) 124     68     56     37     (18 )   55  
 
Income/(loss) from continuing operations (34 )   (142 )   108     61     (20 )   81  
Discontinued operations:
 
Income/(loss) from discontinued operations, net of tax (273 ) (294 ) 21 44 (12 ) 56
Gain on sale of discontinued operations, net of tax 92     92     -     89     89     -  
 
Net income/(loss) from discontinued operations (181 )   (202 )   21     133     77     56  
 
Net income/(loss) (215 ) (344 ) 129 194 57 137
 
Less: Income from noncontrolling interests, net of tax
Discontinued operations 2     -     2     2     -     2  
Net income/(loss) attributable to Sara Lee $ (217 ) $ (344 ) $ 127   $ 192   $ 57   $ 135  
 
Amounts attributable to Sara Lee:
Net income/(loss) from continuing operations $ (34 ) $ (142 ) $ 108 $ 61 $ (20 ) $ 81
Net income/(loss) from discontinued operations (183 ) (202 ) 19 131 77 54
 
Earnings per share of common stock:
Diluted
Income/(loss) from continuing operations $ (0.06 ) $ (0.24 ) $ 0.18 $ 0.09 $ (0.03 ) $ 0.12
Net income/(loss) $ (0.37 ) $ (0.58 ) $ 0.21 $ 0.29 $ 0.08 $ 0.21
 
Effective tax rate - continuing operations 137.1 % 33.8 % 38.0 % 40.6 %
 
(1) Represents a non-GAAP financial measure. See detailed explanation of these and other non-GAAP measures at end of this release.
 

Explanation of Non-GAAP Financial Measures

Management measures and reports Sara Lee’s financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). In this release, Sara Lee highlights certain items that have significantly impacted the corporation’s financial results and uses several non-GAAP financial measures to help investors understand the financial impact of these significant items.

“Significant items” are income or charges (and related tax impact) that management believes have had or are likely to have a significant impact on the earnings of the applicable business segment or on the total corporation for the period in which the item is recognized, are not indicative of the company’s core operating results and affect the comparability of underlying results from period to period. Significant items may include, but are not limited to: charges for exit activities; consulting and advisory costs, transformation program and Project Accelerate costs; impairment charges; pension partial withdrawal liability charges; debt extinguishment costs; spin-off related costs; tax charge on deemed repatriated earnings; tax costs and benefits resulting from the disposition of a business; impact of tax law changes; gains on the sale of discontinued operations; changes in tax valuation allowances and favorable or unfavorable resolution of open tax matters based on the finalization of tax authority examinations or the expiration of statutes of limitations. Management highlights significant items to provide greater transparency into the underlying sales or profit trends of Sara Lee or the applicable business segment or discontinued operations and to enable more meaningful comparability between financial results from period to period. Additionally, Sara Lee believes that investors desire to understand the impact of these factors to better project and assess the longer term trends and future financial performance of the corporation.

This release contains certain non-GAAP financial measures that exclude from a financial measure computed in accordance with GAAP the impact of the significant items and the impact of acquisitions and dispositions, and changes in foreign currency exchange rates. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of Sara Lee’s business that, when viewed together with Sara Lee’s financial results computed in accordance with GAAP, provide a more complete understanding of factors and trends affecting Sara Lee’s historical financial performance and projected future operating results, greater transparency of underlying profit trends and greater comparability of results across periods. These non-GAAP financial measures are not intended to be a substitute for the comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

In addition, investors frequently have requested information from management regarding the impact of significant items. Management believes, based on feedback it has received during earnings calls and discussions with investors, that these non-GAAP measures enhance investors’ ability to assess Sara Lee’s historical and project future financial performance. Management also uses certain of these non-GAAP financial measures, in conjunction with the GAAP financial measures, to understand, manage and evaluate our businesses, in planning for and forecasting financial results for future periods, and as one factor in determining achievement of incentive compensation. Two of the three performance measures under Sara Lee’s annual incentive plan are net sales and operating income, which are the reported amounts as adjusted for significant items and possibly other items. Operating income, as adjusted for significant items, also may be used as a component of Sara Lee’s long-term incentive plans. Many of the significant items will recur in future periods; however, the amount and frequency of each significant item varies from period to period.

Management also has received inquiries from investors seeking to better understand and project the corporation’s tax rate, which can be complex given the multiple foreign jurisdictions in which Sara Lee operates and the numerous tax rules with which it must comply. The information contained in the tables “Reconciliation of as Reported to Adjusted” for each fiscal period includes certain non-GAAP financial measures, and is intended to help investors better understand Sara Lee’s effective tax rate.

The following is an explanation of the non-GAAP financial measures presented in this release.

In the “EPS Reconciliation of as Reported to Adjusted” tables each item in the “Adjusted” column of that table equals the indicated financial measure computed in accordance with GAAP less the impact of significant items recognized in the fiscal period presented.

“Adjusted EPS” excludes from diluted EPS, as reported, for total Sara Lee, for continuing operations or for discontinued operations, as indicated, the per share impact of significant items recognized in the fiscal period presented.

“Adjusted net sales” for continuing operations or discontinued operations, as indicated, excludes from applicable net sales the impact of businesses acquired or divested after the start of the fiscal period and also presents fiscal 2011 results at fiscal 2012 currency exchange rates.

“Adjusted operating income” for continuing operations or discontinued operations, as indicated, excludes from applicable operating income the impact of significant items and businesses acquired or divested after the start of the fiscal period, and also presents fiscal 2011 results at fiscal 2012 currency exchange rates.

“Adjusted operating margin” for continuing operations, a specified business segment or discontinued operations, as indicated, is a non-GAAP financial measure that equals adjusted operating income for the applicable portion of the business divided by adjusted net sales of the corporation (in the case of computing adjusted operating margin for continuing operations) or adjusted operating segment income for a business segment or discontinued operations divided by adjusted net sales for that business segment or discontinued operation (in the case of computing adjusted operating margin for a specific business segment or discontinued operations).

“Adjusted operating segment income” for continuing operations, a specified business segment or discontinued operations, as indicated, excludes from the applicable operating segment income measure the impact of significant items recognized by that portion of the business during the fiscal period presented and the results of businesses acquired or divested after the start of the fiscal period presented, and also presents fiscal 2011 results at fiscal 2012 currency exchange rates.

“Adjusted operating income (including acquisitions)” for continuing operations excludes from operating income from continuing operations the impact of significant items recognized during the fiscal period presented and also presents fiscal 2011 results at fiscal 2012 currency exchange rates; this measure does not exclude the results of businesses acquired or divested after the start of the fiscal period presented.

Sara Lee Corporation
Media: Jon Harris, +1.630.598.8661
Analysts: Melissa Napier, +1.630.598.8739


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